Canadian Dollar extends pullback from two-month high as oil-driven Fed hike bets lift USD
- USD/CAD attracts buyers for the second straight day as Fed hike bets lift the USD.
- Geopolitical risk premiums further drive safe-haven flows towards the Greenback.
- Rising oil prices could underpin the Loonie and cap the pair ahead of the US data.
The USD/CAD pair builds on the previous day's bounce from the 1.3900 neighborhood, or a two-month low, and gains follow-through positive traction for the second straight day on Thursday. The momentum lifts spot prices to the top end of the weekly range, above 1.3950, and is sponsored by a broadly firmer US Dollar (USD).
In fact, the USD Index (DXY) prolongs its weekly ascent for the fourth straight day and jumps to a two-week top as inflation risks stemming from volatile crude oil prices revive hawkish Federal Reserve (Fed) expectations. According to the CME Group's FedWatch Tool, traders are still pricing in a nearly 80% chance that the US central bank will raise borrowing costs by the end of this year. The outlook assists the USD in building on the previous day's goodish bounce from the post-CPI swing low, which, in turn, is seen as acting as a tailwind for the USD/CAD pair.
Adding to this, the US-Iran standoff over the Strait of Hormuz keeps the geopolitical risk premium in play and turns out to be another factor driving safe-haven flows towards the Greenback. President Donald Trump claimed that the US has total control over the strategic waterway, while Iran has pledged to keep the Strait closed until all its demands are met. Moreover, Iran-backed Houthis in Yemen escalated attacks on vessels in the Red Sea and Bab el-Mandeb Strait. This, in turn, helps crude oil prices regain positive traction.
Meanwhile, higher oil prices could offer some support to the commodity-linked Loonie and warrant some caution before placing aggressive bullish bets on the USD/CAD pair. Traders now look to Thursday's US economic docket, featuring the release of the Producer Price Index (PPI) and the usual Weekly Initial Jobless Claims data. Apart from this, comments from influential FOMC members will drive USD demand. Furthermore, fresh developments surrounding the Middle East crisis might infuse volatility around oil prices and provide some impetus.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair shows resilience below the 100-day Simple Moving Average (SMA) at 1.3920, though negative momentum indicators suggest underlying bearish trend despite a modest recovery. Negative Moving Average Convergence Divergence (MACD) reading hints that bullish momentum is not yet fully established. Moreover, the Relative Strength Index (RSI) at around 38 stays below the midline, indicating subdued but stabilizing buying pressure rather than outright oversold conditions.
Meanwhile, a daily close below the 100-day SMA would reaffirm the bearish narrative and expose deeper corrective risks. That said, holding above it would support the prospects for further gains and leave the room for the USD/CAD pair to resume its advance toward recent highs once momentum improves.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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